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A Stock Theory Linking Price
With Satisfaction Isn't Perfect

A Professor's Portfolio Shows Mixed Yield
Of Trading According to Michigan's ACSI

By JON E. HILSENRATHStaff Reporter of THE WALL STREET
JOURNAL

Does customer satisfaction drive stock prices?

University of Michigan Professor Claes Fornell believes it does and has
been personally buying and selling shares of some companies tracked in the
university's American Customer Satisfaction Index, sometimes before the
index is made public,
The Wall Street Journal reported Tuesday.

A closer look at the professor's trading portfolio of about 30 stocks
suggests his theory, which he says he is trying to test by trading the
shares, doesn't work perfectly.

In a statement Tuesday, Robert J. Dolan, dean of the University of
Michigan Business School, said he sought to put an end to this kind of
trading. "I have instructed anyone affiliated with the ACSI not to make
personal use of the information gathered in the course of producing the
quarterly index, prior to the index's release to the general public, and
they have agreed," Mr. Dolan said. The university also said it will
continue to review the situation.

Mr. Fornell has argued there is a close connection between measures of
customer satisfaction and the performance of a company's shares. In a March
2001 article in the Harvard Business Review, he said a one-percentage-point
increase in his customer-satisfaction index correlated to a 3% rise in a
company's market value. The index is based on polls of thousands of
consumers, and tracks their attitudes on the products and services about
190 different companies.

"Satisfied customers reward companies with, among other things, their
repeat business, which has a huge effect on cumulative profits," the
article said.

Some shares that Mr. Fornell said he had in his portfolio because of
their high satisfaction scores have performed well. For instance, the
University of Michigan reported last Aug. 19 its index of customer
satisfaction with Yahoo Inc. had increased to 76
from 73 from 2001 to 2002, making it the highest-rated Internet portal.
(Companies are rated from 0 to 100.)

On the day of the Aug. 19 release, Yahoo's share price rose 12%, or
$1.47, to $13.47. Between the time of the release and the close of trading
on Friday, Feb. 14, 2003, Yahoo's share price rose 56.7%. By comparison,
the Dow Jones Industrial Average was down 9.9% between the day of the
release and Friday. On Aug. 19, the Dow rose 2.4%. Mr. Fornell didn't say
when he purchased the Yahoo shares.

Many other companies with high satisfaction ratings are performing even
more poorly than the overall market. Consider Sara Lee Corp. The University of
Michigan research suggests that customer satisfaction with Sara Lee
products is high and improving. In a release on Nov. 18, the university
said its satisfaction index score for Sara Lee rose to 84 from 81 from 2001
to 2002, among the highest for any product tracked by the university.

But Sara Lee's share price was down 13.7% between the time of the
release and the close of trading Friday. During the same period, the Dow
Jones Industrial Average was down 8%. On the day of the release, Sara Lee's
share price was down 1.5%. Mr. Fornell said last week that Sara Lee was in
his portfolio, though he didn't say when he purchased the shares.

Mr. Fornell said he began trading customer-satisfaction index stocks in
April 2000 for his own account, in an effort to test his theories. In all,
he said he had a portfolio of 30 stocks, 26 of which were long positions,
and four of which were short positions, which included Home Depot Inc., McDonald's Corp., Colgate-Palmolive Co. and Comcast Corp.

Mr. Fornell said last week the portfolio was down 5% to 6% since its
inception, much better than the 30% drop in the Dow Jones Industrial
Average during the period. He added that he didn't believe the public
release of the satisfaction data itself does much to change the value of
share prices. Mr. Fornell didn't respond to a request for further comment
Tuesday.

In some cases, it is possible that the market picks up on changes in
customer-satisfaction trends long before they register in the university's
index, said Jack West, a past president of the American Society for
Quality, which works in partnership with the University of Michigan to
produce the satisfaction index. In the case of Home Depot, a company Mr.
Fornell said he recently sold short, its customer-satisfaction problems
were already widely reported and its share price was already down sharply
before the university said Tuesday that the company's satisfaction readings
dropped during the last year.

"The market might have already discounted for that," Mr. West said.

Many stock analysts aren't convinced that the university's
customer-satisfaction index, in and of itself, is all that important. Tom
Goetzinger, a Morningstar Inc. analyst who follows Home Depot, said he was
familiar with the Michigan study but doesn't hang too much importance on
it, unless there are significant score movements. "In general, I've always
been leery of telephone surveys," Mr. Goetzinger said.